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Powell responds to market volatility

By David Morrison  |  07/01/2019 15:49

US/China trade talks, strong payrolls and dovish comments from Fed Chairman Jerome Powell lift equities and US Treasury yields while dollar slips

Friday’s US employment report came in much better than expected. US companies added 312,000 workers to their payrolls in December - well above the 184,000 expected. In addition, the two prior releases were revised up by 54,000. Equity markets which were already bouncing sharply on news that US/China trade talks would take place today and Tuesday surged on the news. Meanwhile, FX markets were relatively subdued until they heard comments from Federal Reserve Chair Jerome Powell. As far as investors were concerned these were decidedly dovish. Mr Powell said: ‘’The Fed wouldn’t hesitate to change balance sheet policy if needed,’’ and this could be a key point for the fate of US dollar over the short to mid-term. Mr Powell now appears to be pivoting away from last month’s hawkish Fed statement and upbeat FOMC quarterly summary and this could take away some of the recent support for the greenback. We may learn more from the FOMC minutes this Wednesday. 

US Non-Manufacturing disappoints

US and European stock indices were initially firmer in early trade on Monday, extending sharp gains made at the end of last week. Traders were looking for an excuse to buy into oversold markets and they got it when the US/China trade talks were announced, the People’s Bank of China declared two 50 basis point cuts to the Reserve Requirement Ratio for banks, a strong US Non-Farm Payroll release and Powell’s dovish pivot. However, by mid-afternoon the picture was more mixed with the FTSE 100 and DAX slightly weaker and the US flat. There was more disappointing news on the US economy as the ISM Non-Manufacturing PMI slipped to 57.6, lower than the 59.6 expected and well down on the previous reading of 60.7. This follows on from last week’s poor ISM Manufacturing PMI and is a particular worry as these surveys are forward-looking and provide additional evidence that the US economy isn’t as strong as the Federal Reserve was suggesting in October. The only bright spot is that the data releases support the view that the Fed may not only hold off from raising rates next quarter, but may also consider reducing or even halting its balance sheet reduction. The trouble with this is that a slowdown in economic growth will spur recession fears and the Fed (let alone other developed-world central banks) doesn’t have sufficient ammunition to loosen monetary conditions to deal with such an outcome.

USD losing ground

The US dollar lost ground today against most of the majors. Again, the risk-on move we saw on Friday and Powell’s fresh dovishness has led investors to sell the dollar and diversify. With UK Members of Parlaiment back after the Christmas recess, Brexit will be a hot topic once again. Over the weekend UK Prime Minister Theresa May insisted that a ‘meaningful vote’ will take place in January, but she wouldn’t be drawn on a precise date. So once again moves in sterling will be headline-driven. The EURUSD has bounced off support at 1.1300 and is now testing resistance around  1.1450 where the 100-day simple moving average comes in. The next level of resistance comes in around 1.1500.

Gold hits 7-month high

Early on Friday gold pushed up towards $1300 to trade at its highest level since last June. Gold is now up around 8% since mid-November while the Dollar Index has only lost 2% over the same period. In the short term support comes in around $1,275-1,280 and below there sellers will target $1,250 or even $1,240. There’s some solid resistance around $1,295-1,300 but this could be broken if we see another big risk-off move. It’s worth noting that Fed Chair Powell is due to speak on Thursday and the US consumer price index will be released on Friday.
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